George Lucas, Raiz CEO
Global equities rebound on strong US jobs data
Last week global equities found support from a better-than-expected US Employment Report for May, which saw the jobless rate dip to 13.3 per cent and the US recover 2.5 million jobs, and moves from the European Central Bank (ECB), which boosted its bond-buying stimulus by €600 billion.
The S&P 500 has now risen by over 40 per cent from its intraday low on 23 March, which means that is has recouped about three quarters of its peak-to-trough fall faster than in any previous bear market. Indeed, it is now less than 10 per cent below its peak on 19 February.
The rally in markets has been underpinned by retail clients’ expectations that the current downturn, while deep, will be short-lived. This is perhaps too optimistic, given the size of the economic shock, the fact that the virus is not yet under control and the risk of secondary waves of infection.
Remember, just because the stock markets are rallying it doesn’t mean that everything is okay.
ECB stimulus moves key to eurozone recovery
The ECB’s decision to increase its asset purchases by €600bn, and the positive reaction in markets, supports the view that policymakers’ efforts to contain economic stresses will remain a key driver of eurozone assets this year.
The past few weeks have been good for eurozone assets. Peripheral government bonds have rallied, with the Italian 10-year yield falling, while the euro has climbed back to the level it was trading at in January against the US dollar. Also, eurozone equities have outperformed US equities.
The European Commission proposal for an EU Recovery Fund has also fuelled the recent outperformance of eurozone assets. The fund would provide a combination of grants and loans to the countries most affected by the pandemic, financed by bonds backed jointly by EU members.
Negotiations over the proposed fund will probably be difficult given the opposition to the proposal from the so-called “frugal four” — Austria, Denmark, Netherlands, and Sweden – and may not be settled at the upcoming European Council summit. However, given that the four largest EU members support the proposal, it will ultimately be approved in some form.
Aussie dollar surges on virus risk reappraisal
Domestically, the Australian dollar has been amongst the best-performing G10 currencies in the past week, rising against the US dollar by over 4 per cent. The local currency reached 70.04 US cents on Friday, its highest level since early January when COVID-19 had yet to become a global pandemic.
Risk appetite has been a key factor behind the recent performance of the AUD/USD. The Aussie was hit very hard during the sell-off in risky assets between mid-February and mid-March. It has also been aided by the recovery in commodity prices, which has improved the terms of trade. At the end of the day the Australian dollar is a commodity currency driven more by China sentiment and commodity prices than interest rate differentials. 80 US cents here we come.
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